Key takeaways
The U.S. economy’s momentum carried into third quarter, with GDP growing at an annualized 2.8% rate.
The strength of the economy continues to buoy the stock market while contributing to rising long-term interest rates.
At the same time, the Fed has initiated what is expected to be a series of interest rate cuts.
The economy’s ongoing strength was evident again in 2024’s third quarter, as Gross Domestic Product (GDP) grew at a 2.8% annualized rate, based on the initial reading from the U.S. Bureau of Economic Analysis. It marked the 11th consecutive quarter of GDP growth, and represented only a slight drop from the second quarter’s 3.0% growth rate. 1
As was the case in prior quarters, consumer spending was the biggest driver of economic activity. This included goods spending, particularly in the areas of prescription drugs and motor vehicles. Services spending, especially in the areas of healthcare, food services and accommodations, also boosted the economy. Exports and federal government spending likewise fueled growth, while a rise in imports subtracted from overall GDP. 2
Source: U.S. Bureau of Economic Analysis, “Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period,” October 30, 2024.
Third quarter GDP of 2.8% was in line with market expectations. It’s also an indication that the economy, to this point, is growing at a faster pace than was anticipated by the Federal Reserve (Fed), which projected 2% GDP growth for all of 2024. 3 Nevertheless, the current state of the economy is likely to be viewed favorably by the Fed. In mid-September, the Fed implemented a 0.50 % interest rate cut, its first in more than four years. This came after inflation leveled off significantly.
“It seems likely that the third quarter GDP number keeps the Fed on track for further rate cuts,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Although the Fed may keep a closer eye on jobs market data and the indications it offers of the economy’s staying power.”
“It seems likely that the third quarter GDP number keeps the Fed on track for further rate cuts,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Although the Fed may keep a closer eye on jobs market data and the indications it offers of the economy’s staying power.”
The Fed’s rate cuts are designed to impact the broader economy. Fed Chair Jerome Powell stated that “As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased.” 4
“Modest, steady economic activity continues to be the path we appear to be on at this point, with no serious recession risk,” says Haworth. He believes ongoing labor market strength is the key variable that could impact consumers. “A sudden jump in layoffs would be a negative signal, but we’re not seeing that,” says Haworth. “Employers are hanging on to workers, particularly in areas where they struggled to fill positions before.” says Haworth.
Despite the Fed’s initial rate cut, long-term interest rates recently moved higher. This factor complicates matters for businesses, particularly as it relates to business capital investment. Nevertheless, corporate capital expenditures remain solid to this point.
The economy’s ongoing strength helped corporations meet or exceed earnings expectations, fueling further stock market gains. At the end of October, the S&P 500 is on pace to achieve 20%+ returns for the second consecutive year. 5
In the current environment, investors may wish to consider a neutral portfolio weighting between equities, fixed income and real assets. Haworth adds if the economy manages to demonstrate ongoing strength in the coming months, that could work to benefit non-technology sectors of the market that are more dependent on favorable economic trends.
Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet your needs in today’s market and economic envronment.
Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.
A recession is a significant and prolonged downturn in economy activity. Some define a recession as two consecutive quarters of declining Gross Domestic Product (GDP) growth. However, more complex formulas are often used. The accepted arbiter of a recession, the National Bureau of Economic Research (NBER), considers a variety of measures to determine a recession’s timing and length. These may include nonfarm payrolls, industrial production and retail sales, along with key measures such as GDP. Quite often, the NBER makes a final recession determination months after it begins.
The most recent recession was an unusual one, related to the start of the COVID-19 pandemic. It lasted only from February through April 2020, one of the shortest recessions on record. But it also was one of the most severe. According to the U.S. Bureau of Economic Analysis, the U.S. economy declined at an annualized rate of 5.5% in 2020’s first quarter and declined again by 28.1% (annualized) in the second quarter. However, it quickly rebounded, growing by a 35.2% annualized rate in the third quarter. This was an unusual circumstance related to the partial closing of many businesses and schools and the sudden layoff of workers in response to the onset of the pandemic, followed by a rapid reopening for most businesses. The previous recession occurred more than a decade earlier, the so-called Great Recession of 2007-2009. This recession was tied to the financial crisis that rocked the global economy for an extended period.
While it is difficult to predict a recession in advance, the current state of the economy makes the possibility of a recession in the near term appear remote. “It seems likely the economy may avoid a recession in the near term, though we can expect that real Gross Domestic Product (GDP) growth will remain modest over time,” says Matt Schoeppner, senior economist at U.S. Bank. “It might qualify as what we call a ‘growth recession,’ where we see a slow economy, but with few ramifications for the job market.” In 2024’s first quarter, the economy grew at an annualized rate of 1.6%, but improved significantly in the second quarter, growing at a 3.0% annualized rate.2
After the slowest year for existing home sales in nearly 30 years last year, the housing market is still struggling to escape the doldrums.
The yield curve between 2-year and 10-year Treasuries is no longer inverted after more than two years.
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